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Tony retreats from public view and focusing on the design of his new power suit , refining its size and flight capability. He asks his assistant Pepper Potts to remove his old chest reactor and put in a new, much cleaner one. He tells Pepper to throw the old one away but she keeps it instead.

Stark has JARVIS assemble the new suit for testing, he also installs JARVIS as the A.I. computer for the suit. He then dons the suit and flies all over Los Angeles but falls when his armor turns to ice as it reaches the Earth's peak atmosphere though he managed to powers up his armor in mid air and flies back to his home, successfully testing his new armor.

During his first public appearance since his return to the US, he is accosted by Christine Everhart , who shows him pictures of Stark Industries weapons in the hands of terrorists. Tony then confronts Obadiah Stane about the pictures and learns that it was Stane who supplied the terrorists with Stark tech and the one who ordered Stark's abduction, Stane leaves Tony at the party wondering. Also at the party, Pepper Potts is approached by Agent Phil Coulson of SHIELD and asks for a schedule to meet Tony Stark.

Meanwhile, Raza and his men finds the remains of the armor Stark used to escape and has it roughly assembled to examine its designs.

Faced with the realization of what his company has done, Tony dons his power suit , a version of the second suit but has been weaponized and colored in red and gold. Tony flies to afghanistan and rescues Yinsen's village from a squad of Ten Rings terrorists led by Abu Bakaar. He kills most of the terrorists but leaves Abu Bakaar's faith to the villagers. He then heads over to their camps and destroys all their weapons stockpiles and even managing to blow up a tank.

As Stark flies away from the scene, he is detected by the US Air Force who has two F-22 Raptors chase him. Lt. Colonel James Rhodes was called to assist the Air Force against the unknown target. He calls Tony if he knows anything about a new development but Tony declines about his knowledge. The F-22 Raptors then open fire at the unknown target. During the confrontation, Stark accidentally hits one of the jet's wings. Its pilot ejects but his chute seemed to have jammed. Tony dives down to help the pilot release his parachute before escaping, he then calls Rhodes and tells him that is the man in the suit. The next day, Rhodes delivers a message saying that the events happened involving two F-22 Raptors was a training exercise...

In a post-credits scene, Stane visits Raza who shows him the Mark 1 armor and asks for a prize. Stane responds by having his men kill Raza's bodyguards and Raza himself is paralyzed by Stane who then takes the armor.